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California State Tax Updates

For the latest news and updates on California state and local tax

September 23, 2021

California Releases Guidance on its Newly Enacted Pass-Through Entity Tax (PTE)

The California Franchise Tax Board (FTB) issued guidance about the newly enacted elective pass-through entity tax (PTE) effective January 1, 2021, to January 1, 2026. [see A.B. 150(2021)] The FTB discusses how certain qualifying PTEs may annually elect to pay this entity-level state tax on income. In return, qualifying taxpayers receive credit for their share of the entity-level, ultimately reducing their California personal income tax.

Who Qualifies?

A “qualified taxpayer” can be individuals, fiduciaries, estates, or trusts subject to California personal income tax and must be a partner, member, or shareholder of a qualified electing entity.  Note that a taxpayer must approve of having their pro-rate share of the qualified income of the electing qualified PTE.

PTE Election

A qualified taxpayer can make an annual election on a timely filed tax return. However, once the election is made, it is irrevocable for that year and is binding on all PTE partners, shareholders, and members.

For the 2021 tax year, the election must be made when the tax return is filed. Beginning January 1, 2022, and before January 1, 2025, the qualifying taxpayer must make the election when the tax return for the taxable year is filed and remit payment by June 15th. Otherwise, the qualifying taxpayer cannot make the PTE election.

Due Dates

The elective tax must be paid by the due date of the original tax return. However, for the 2022 to 2025 tax years, the first payment of $1,000 or 50% of the elective tax paid in the prior taxable year, whichever is greater, is due by June 15th of the taxable year of the election. The remaining amount must be paid by the due date of the original return without regard to extensions.

PTE Calculation

Each qualified shareholder’s distributive share of income subject to California personal income tax is subject to tax at 9.3%.  Please note that some of California’s personal income tax brackets are lower and some are higher than the PTE rate.  As such, some taxpayers may be over-paid and others under-paid as a result of making a PTE election.  Please note that overpayments resulting from a PTE election are not refundable – taxpayers who are overpaid as a result of a PTE election may carryforward the unused credit for five (5) years.

September 16, 2021

California Franchise Tax Board Announces Tax Relief for Californians Affected by Wildfires

Due to the California wildfires, the California Franchise Tax Board has extended the deadline to file California 2020 income tax returns, which would have been due between July 14, 2021 through November 15, 2021.  The deadline extension to November 15, 2021 is granted to Taxpayers in declared disaster areas.  The filings included in this extension are: Individual filers who previously claimed an October 15th extension (strictly for the return filing and not the tax payment, as the tax payments were due on May 17, 2021), business entity filings due between the period of July 14, 2021 through November 15, 2021, and quarterly estimated tax payments due during the extension period.

June 28, 2021

California Provides Small Business Relief Payment Plans for Sales Tax

The CDTFA recently issued guidance for small businesses concerning relief payment plans for sales tax due to Covid-19. Small businesses with annual taxable sales of less than $5 million can obtain a 12-month, interest-free payment plan for up to $50,000 of its sales tax liability.  The loan must be paid in full by April 30, 2022, to be eligible for zero interest. The good news is that any business that took advantage of the prior 12-month, interest-free payment plan due July 31, 2021, is eligible to participate in this new 12-month interest-free payment plan. This taxpayer relief is only applicable to sales and uses tax returns due between December 15, 2020, and April 30, 2021. Taxpayers must apply for this payment plan no later than August 16, 2021, through their CDFTA online account.

California Enacts Elective Pass-Through Entity Tax and Several Other Tax Law Changes

Governor Newson recently signed Assembly Bill 150, which allows for an elective pass-through entity tax and amends and broadens the small business hiring credit (aka the Main Street Small Business Tax Credit). The law enacts the Small Business Relief Act, which permits a qualifying entity doing business in the state to annually elect to pay an elective tax based upon its qualified net income computed at the rate of 9.3%. The qualified entity must be doing business in California and is required to file either an S-Corp, Limited Liability Company, or Partnership tax return for taxable years beginning January 1, 2021, through January 1, 2026.  A qualified entity is defined as an entity that is taxed as a partnership or S-corporation. The entity’s partners, shareholders, or members in the taxable year of election are exclusively corporations or taxpayers (not partnerships). The entity is not a publicly traded partnership or an entity permitted/required to be part of a combined reporting group.  The election is irrevocable and is made on the original, timely filed return for that taxable year.

June 22, 2021

California Enacts SALT Limitation Workaround

California Governor Gavin Newsom has signed a budget trailer bill that creates an elective pass-through entity tax. For taxable years beginning on or after January 1, 2021, and before January 1, 2026, qualified entity doing business in California can make an annual, irrevocable election to pay a pass-through entity tax similar to the New York PTET. The tax is computed at the rate of 9.3% for the taxable year for which the election is made.

Entities eligible to make the California PTET election include entities taxed as partnerships (except publicly traded partnerships) and S Corporations. This elective tax is in addition to, and not in place of, any other tax required to be paid under California’s personal income tax or corporation tax laws. As such, owners of pass-through entities making the election claim a credit for their share of the pass-through entity’s PTE tax on their respective returns. If this results in an overpayment, excess credit may be carried forward for five (5) years.

For taxable years beginning on or after January 1, 2021, and before January 1, 2022, the elective tax is due and payable on or before the due date of the original return that the entity is required to file, without regard to any extension of time for filing the return, for the taxable year of the extension. For future tax years, the Department will establish new due dates for making the election and payment of the tax.

The concept of pass-through entity tax is still fairly new feel free to read Withum’s discussion of the rapid changing landscape of PTET’s.

June 18, 2021

California Issues 45-Day Notice in Relation to Proposed Regulation on Pass-through Entity Withholding

The California Franchise Tax Board (FTB) has issued a 45-day notice of amendments to the draft language of the proposed regulation at California Code of Regulations, Title 18, Section 18662-7, Domestic Pass-Through Entity Withholding (Proposed Regulation), and proposed amendments to the final regulations at Sections 18662-0 through 18662-6 and 18662-8 (Final Regulations)(together, the “Proposed Regulations”). The Proposed Regulations include, among other things, measures to: add language relating to domestic pass-through entity withholding; amend provisions on foreign partner withholding to more closely reflect the federal language; and specify withholding requirements for trusts and estates. The purpose of the notice is to elicit comments on the newly revised Proposed Regulations. Written comments regarding the Proposed Regulations will be accepted until 5:00 p.m. on July 23, 2021. All inquiries and comments regarding the notice should be directed to Leah Thyberg of the FTB whose contact information is set forth in the notice.

California Updates its Golden State Stimulus Webpage

The California Franchise Tax Board (FTB) has updated its Golden State Stimulus webpage. Among other things, the updated webpage refers to the governor’s proposal to add and expand stimulus payments for more Californians and notes that these additional payments are not yet available and are pending legislative action; and expands the discussion of when recipients will receive their payments. Revisions have also been made to the following taxpayer assistance sections: “How to get your payment”; “What to do” for a taxpayer who filed a 2020 return but did not claim a California earned income tax credit for which the taxpayer is eligible; and “Need some help?” For more information, please visit the FTB website on this topic.

June 9, 2021

Update on California’s New Webpage for Assembly Bill 80 and Forgiven Loans

The California Franchise Tax Board (FTB) has replaced the webpage it recently created for Assembly Bill 80 and the tax treatment of forgiven loans with a new webpage. After providing an overview of the bill, the webpage covers three topics: (1) income, (2) expenses, and (3) “What to Do” (i.e., steps taxpayers need to take to amend returns to claim expenses made deductible under A80 that were not previously deducted). For more information, please visit the California Assembly Bill 80 Website.

May 26, 2021

California Franchise Tax Board Creates Website on Tax Treatment of Forgiven Loans

The California Franchise Tax Board (“FTB”) has created a webpage to provide guidance on the State tax treatment of forgiven loans. More specifically, the website will address three topics: (1) the exclusion from gross income for loans that are forgiven under California’s conformity to federal provisions such as the Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loan (“EIDL”) advance grant amounts; (2) expenses paid for with for PPP loans and EIDL advance grants that were forgiven; and (3) California’s conformity, with modifications, to four federal acts—the CARES (Coronavirus Aid, Relief, and Economic Security) Act, the Paycheck Protection Program and Health Care Enhancement Act, the Paycheck Program Flexibility Act of 2020, and the Consolidated Appropriations Act, 2021—and the date of California’s conformity to each of them. The website does not have any content posted at this time, but updated in the coming weeks.

California Franchise Tax Board to Hold Sixth Interested Parties Meeting Regarding Market-Based Sourcing

The California Franchise Tax Board (FTB) will hold a sixth interested parties meeting (“IPM”) to solicit public input regarding additional proposed amendments to California’s market-based rules regulation (Cal. Code Regs. Title 18 § 25136-2). The sixth IPM will be held telephonically on Friday, June 4, 2021, at 10:00 a.m. To attend, interested parties need to RSVP to the FTB by May 28, 2021, at the email address set forth in the notice. Instructions on how to participate in the sixth IPM are set forth in the notice as well. The proposed amendments to be discussed include: added definitions of asset management services and of professional services; examples to be included in the regulation; addition of a special rule for certain professional services; and a change to the applicability date (to taxable years beginning on or after January 1, 2023).

May 13, 2021

California Rules Taxpayers were Residents on Date of Stock Sale

Taxpayers were residents (and domiciliaries) of California before 2008. On July 18, 2008, Taxpayers sold their shares in a corporation and did not pay California tax on the gain from that sale because they considered themselves nonresidents as of February 26, 2008 (the date on which they rented an apartment in Henderson, Nevada). The California Office of Tax Appeals (OTA)—affirming the Franchise Tax Board’s (FTB’s) proposed assessment of additional taxes against the Taxpayers—determined that even though Taxpayers took some steps to evidence California was not their domicile in renting the Nevada apartment, they did not adopt a new permanent home in doing so (the apartment was part of their plan to find a new permanent home, but was not the actual move to a new residence with the intent to remain there permanently). Further, because the taxpayers were California domiciliaries and physically in the State for a majority of the time leading up to and on July 18, 2008, their 28-day presence in Nevada (date they had moved out of California to the date of the stock sale) did not outweigh the prior California residency/domicile contacts so as to greater a greater connection to another state. Therefore, the Taxpayers were California residents on the date of the stock sale, and owed personal income tax on the gain on the transaction.

May 5, 2021

California Postpones Deadline for Claiming 2016 Tax Refunds to May 17, 2021

The California State Controller and Franchise Tax Board (FTB) announced an extension to May 17, 2021, for individual California taxpayers to claim a refund for tax year 2016. Taxpayers normally have four years to file a claim for a state tax refund in California. Tax year 2016 state income tax returns were due in 2017, so the standard four-year statute of limitations for claiming a refund would have expired on April 15 of this year. With the postponement, individual taxpayers who are due a refund may now file their return for the 2016 tax year no later than May 17, 2021, to claim their money. Similarly, the Internal Revenue Service (IRS) recently announced an extension to May 17 for individual taxpayers who are due a refund on their tax year 2017 federal income tax returns. The IRS normally has a three-year statute of limitations to file a claim for a federal tax refund. Taxpayers claiming a state refund for previous tax years can find Form 540 on FTB’s forms locator for the applicable tax year.

California Amends and Adopts Regulations Related to Other Tobacco Products 

In November 2016, California voters approved Proposition 56, which included electronic cigarettes in the definition of other tobacco products (“OTPs”). Effective April 6, 2021, California has amended State regulation on wholesale cost of tobacco products (Title 18, Section 4076): which now: defines the terms “electronic cigarettes,” “sold in combination with,” and “tobacco products”; clarifies the scope of manufacturing costs in determining the wholesale cost of tobacco for a manufacturer or an importer that is also a distributor; and provide examples of items that are and are not considered tobacco products. Further, California has also adopted a Regulation on tobacco product manufacturers (Title 18, Section 4077), which among other things: defines the term “tobacco product manufacturer”; provides that a retailer who mixes, blends, or combines a tobacco product that is not in a form suitable for human consumption, such as liquid nicotine, and other ingredients and components to make a product that is suitable for human consumption is a tobacco product manufacturer; and provides that a retailer who is not a licensed manufacturer, importer, or distributor must purchase its tobacco products from a licensed tobacco products distributor or wholesaler. If you sell OTPs in California and have questions about local taxation issues, please reach out to Withum’s State and Local Tax Group.

March 23, 2021

California Update on Extension of Filing Deadline

The California Franchise Tax Board (FTB) has announced that California will extend the state tax filing and payment deadline for 2020 returns for individuals to May 17, 2021. This extension does not apply to estimated tax payments due on April 15, 2021. This relief is available to all individual California taxpayers (including those who file composite returns) without the need for them to file a request with or contact the FTB. The FTB also has created a FAQs regarding the extension, 2020 tax year extension to file and pay (individual) . The California extension is similar to the federal tax filing and payment deadline extension the Internal Revenue Service (IRS) and the Treasury Department announced on March 17, 2021. In IR:2021-59 , they announced that the federal income tax filing and payment due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021, and that this relief does not apply to estimated tax payments that are due on April 15, 2021, which remain due on April 15, 2021. ( News, Filing and Payment Extension for Individuals, California Franchise Tax Board Homepage, 03/17/2021 ; California FTB News Release No. 03/19/2021, 03/19/2021.)

March 17, 2021

California Amending Regs to Clarify How Petitions for Alternative Apportionment are to be Considered by the FTB

The California Franchise Tax Board (“FTB”) voted to proceed with adopting certain proposed amendments to California Code of Regulations, Title 18, section 25137 (Regulation); which permits a taxpayer to petition for the use of an alternative apportionment method, if the standard allocation and apportionment provisions do not fairly reflect the extent of a taxpayer’s business activity in California. There was limited formal guidance as to how such petitions were to be considered by the FTB, so the proposed amendments are aimed at addressing that issue.

May 2, 2020

Conformity to the CARES Act

The California Franchise Tax Board (FTB) provided some preliminary information regarding California’s conformity and nonconformity to the CARES Act. California generally conforms to the pension-related items of the Act, such as early withdrawal penalty and minimum distribution rule changes. However, California does not automatically adapt to the modifications made concerning loans from a qualified retirement account. California does not conform to other changes made by the CARES Act, including those related to loan forgiveness compared to the paycheck protection program. Furthermore, California does not conform to the provisions regarding net operating loss carrybacks, charitable contributions, student loan forgiveness, business interest limitations, and the prior year alternative minimum tax liability for corporations. The FTB will issue further guidance as it completes its analysis of the CARES Act.

Source: https://www.ftb.ca.gov/about-ftb/newsroom/tax-news/may-2020/californias-conformity-with-the-federal-cares-act.html

March 20, 2020

CA Filings and Deadlines Info

Specific info on type of filing and deadlines can be found on the State of California Franchise Tax Board site here.

CA Franchise Tax Board (“FTB”) Issues Relief Provisions for Taxpayers Amid COVID-19

This relief includes changes to the various tax filing and payment deadlines that occur on March 15, 2020, through June 15, 2020, to July 15, 2020. “This includes:

  • Partnerships and LLCs who are taxed as partnerships whose tax returns are due on March 15 now have a 90-day extension to file and pay by June 15.
  • Individual filers whose tax returns are due on April 15 now have a 60-day extension to file and pay by June 15.
  • Quarterly estimated tax payments due on April 15 now have a 60-day extension to pay by June 15.”

Taxpayers claiming COVID-19 relief should write the name of the state of emergency (for example, COVID-19) in black ink at the top of their tax return to notify FTB of the extension period provided by the relief. If taxpayers are e-filing, they should follow the software instructions to enter disaster information.

In addition, the FTB will also waive interest and any late filing or late payment penalties that would normally apply.

More on Taxes and the Coronavirus Pandemic.

Disclaimer: Please note this is the information that is readily available at this time, it is subject to change so please consult your Withum tax advisor.

November 2019

Determining If a Taxpayer is Doing Business in California

The economic nexus thresholds for determining if a taxpayer is doing business in California for the 2019 taxable year were released by the California Franchise Tax Board. A taxpayer is considered to be doing business in California if it is organized or commercially domiciled in California; its sales in California exceed a threshold amount or 25% of its total sales; its real property and tangible personal property in California exceed a threshold amount or 25% of its total real property and tangible personal property; or the amount paid in California by the taxpayer for compensation exceeds a threshold amount or 25% of the total compensation paid by the taxpayer. The threshold values for the 2019 tax year are as follows: sales, $601,967; property, $60,197; and compensation, $60,197. (Memorandum on Indexing, Personal Income Tax Law, 2019 Tax Year, California Franchise Tax Board, 08/27/2019.)

Updates by City

City of Los Angeles

Aprl 2, 2020

Emergency Micro-Loans

The City of L.A. is offering emergency micro-loans between $5,000 and $50,000 to small businesses affected by the coronavirus. For micro-loan terms and eligibility, please click here: https://ewddlacity.com/index.php/microloan-program.

Source: https://laist.com/2020/03/23/where_to_get_financial_assistance_food_and_more_during_the_coronavirus.php

San Francisco

Aprl 2, 2020

Small Business Resiliency Fund

Due to the disruptions caused by COVID-19 to the small business community, the COVID-19 Small Business Resiliency Fund was created. It allows impacted small business owners to access up to $10,000 for employee salaries and rent. This program is administered in partnership with Northeast Community Federal Credit Union.

To be eligible for the COVID-19 Small Businesses Resiliency Fund, small businesses must:

  1. Have at least 1 employee and no more than 5 employees
  2. Demonstrate a loss of revenue of 25% or more
  3. Have less than $2,500,000 in gross receipts
  4. Be engaged in activities that are regulated by the City and County of San Francisco and have a license/permit associated to that regulation

Applications must be completed and submitted via email to investsf@sfgov.org or they can be mailed or delivered to:
Attn: Judy Lee – COVID 19 Small Business Resiliency Fund
1 Dr. Carlton B. Goodlett PL. Rm# 448
San Francisco, CA 94102

Please review the application for all needed documents to be submitted. In addition, the following will be required:

  1. Proof of Payroll Costs
  2. Proof of a 25% or more revenue loss

Source: https://oewd.org/covid-19-small-business-resiliency-fund

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